Car Title Loans: Good or Bad Idea for Borrowers?
It’s been a hell of a week. Hell of a month. Hell of a year. No matter what you do, your finances just seem to be spiraling out of control. Every time you almost get it all settled, something happens that puts you right back where you started. Your credit isn’t great, you don’t have an emergency fund, and no one you know can lend you money. What do you do when you need cash fast?
Well, a lot of people turn towards title loans. You might have heard that these are a little sketchy, but are they really all bad? Are title loans ever a good idea?
What Is a Title Loan
First, let’s back up and talk about what a car title loan actually is. It is a type of secured loan in which you put up the title of ownership for your car as collateral. If you fail to pay back the loan by the due date, the lenders have a right to repossess your car and sell it for profit.
Title lenders are usually located in their own shop (rather than housed in a bank or alongside a more traditional lender), and you can be in and out with cash in minutes with up to about half your car’s value in cash. Part of what makes car title loans so appealing is their ease of access. There is very little required to qualify.
What You Need for a Car Title Loan
- A valid government-issued ID
- Proof of residency
- Proof of income
- Names and phone numbers of a few references
- A car that you own outright
Depending on which lender you choose, they might have slightly different requirements, but the above are pretty standard. They typically do not require a credit score check.
Why Car Title Loans Are a Bad Idea
Title loans are often considered predatory because they have high APRs, sometimes in the triple digits, short repayment terms, and considerable fees. It also runs the risk of losing your car, which is probably your main means of transportation to get to work so that you can earn money in the first place.
Title loans are not your only option if you are strapped for cash. You can also work to negotiate payment plans, visit a credit counselor for advice, or even take out a cash advance on your credit card. The latter is usually a bad idea, but depending on your bank, it might be a better solution than a title loan.
When Car Title Loans May Not Be a Bad Idea
However, a title loan might be your best bet if you can’t get solutions from a credit counselor or a bank, especially if you are confident in your ability to pay back the loan when it comes time. Despite the doom and gloom coverage surrounding title loans, most borrowers keep their cars. On the other hand, many pay much more than the loan is worth— be sure that you can overcome that hurdle.
Luckily, there are regulations on many title lenders to help you do just that.
Regulations Governing Title Lenders
Title loan regulation varies by state. Many states have outright prohibited them, so they are certainly not an option if you live in one of those states. Several states have also placed such low caps on their APRs that it’s not profitable for a title lender to operate there. Check your state’s law before pursuing a title loan.
Some states also prevent you from “rolling over” the loan too many times. This is the practice of taking out an additional loan to pay for your overdue first one. This can get very expensive very quickly, so some states have put a limit on how many times you can roll over a loan in order to prevent you from perpetual debt.
When signing for a car title loan, make sure to read the fine print, and don’t be afraid to ask clarification questions! You want to know exactly what you’re obligated to pay, what the fees and the APR are, and what are the consequences if you can’t pay back the loan. Title loans may or may not be the solution to your specific problem, but ultimately it is your decision.
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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.
This post was updated November 21, 2017. It was originally published November 22, 2017.